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Friday, November 13, 2009

History will associate the legacy of Alan Greenspan with that lame excuse.

As the former Fed Chairman, he was definitely one of the chief persons responsible for causing the housing bubble. How much should he be blamed ? That depends on who you ask. He certainly cannot be responsible for the decisions made by others. But he should share a big portion of the blame. Not only did he promote the ultra-low interest policy for too long, but even in the role of a regulator, he failed miserably. His argument is, he did not turn a blind eye, and he just didn't get it.

Didn’t get it ? It's hard to accept that. The debate about whether or not there is a bubble wasn't exactly a secret. He participated in that debate, and defended his banking industry. Consider this speech ...

"Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities."

In other words, subprime was fine. And, there is no systemic risk system at all, because as he clarified in an another speech ...

The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions. ... Derivatives have permitted the unbundling of financial risks.

Derivatives reduced risks ? That and the so called "more-sophisticated approach" brought down the world economy like a house of cards.

Greenspan cannot hide under "I didn't get it", as he was arguing against "it", saying "it" won't happen. But "it" did, and not only wiped out many financial institutions, it wiped out jobs and livelihoods.

In addition, he also encouraged the practice of taking risky mortgages. Risky as in "adjustable rate mortgages" - which have a risk of interest rate changes, in addition to other risks. Now in fairness, hardly anyone was listening to his incomprehensible speeches to decide what mortgage product to use. But nevertheless, it was irresponsible of him to say ...

Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.

There is a qualifier at the end, but he was saying this when the interest rates were historically low and indeed had the risk of moving upward. Read the entire speech for more gems, to decide if he should share any blame in promoting risky mortgages.

This is a rather sad end for a person of his intellect. He was a big follower and supporter of Ayn Rand's philosophy. Sometime, somewhere down the road, he shunned Objectivism. After warning investors about their "irrational exuberance", he changed the tune and claimed in this speech that

As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact--that is, when its bursting confirmed its existence.

Any student of financial history knows that to be simply untrue. Bubbles are NOT that hard to identify.

Nevertheless, I have to include some of his other quotes that I really agree with.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs.

Whatever you tax, you get less of.

Once upon a time, much before his constant deification on CNBC, Alan Greensapan was one very smart man.